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Cyprus and re-regulation

The Tax Justice Network dishes dirt on what the “financial services” industry of Cyprus was selling. So will the EU really close this business down in Cyprus? And will it roll on from that to the many other tax havens (or what the TJN people call “secrecy jurisdictions”) either in the EU or under the protection of various EU states? It could, in the end, go that way.

We can hope that this is a step on the road to bringing the financial sector under control. That may seem a vain hope, given the political power of the financial sector and of the other interests served by poorly regulated finance. But consider what happened to the pay of American bankers after the Crash of 1929. People at the top of banking in 1929, like bankers today, were very highly paid relative to others with similar levels of education and responsibility. They were so highly paid because weak regulation created demand for aggressive, risk-taking, rule-skirting behavior on the part of bankers, and this behavior was elicited with the carrot of wealth. In the years after the Crash – especially with the New Deal, from 1933 onwards – regulations were tightened, but in 1939 bankers were still grossly overpaid compared with, say, engineers. It took over ten years after the crash to get the financial sector into its proper place. By 1942, though, banker’s relative pay had fallen sharply, and it didn’t get out of control again until the 1980s, until Reagan and Thatcher. For the gory (i.e., technical) detail, and some nice graphs, see this paper by Philippon and Reshef.

Two (slightly) lighter notes on Cyprus: in Saturday’s Guardian, Ian Jack profiled the British expats who enjoy low taxes, sun, and the UK winter fuel allowance due to all retired Brits. These aren’t Russian oligarchs or Starbucks or anything – they are minnows in the tax minimization game, but Jack has a hard time feeling sorry for them – perhaps because they’re Telegraph readers.